Durbin Amendment Shakes Up Debit Rewards

The Durbin amendment is like a big earthquake: Those closest to the event experience the most severe trauma. Those further away experience less shock but are still left feeling anxious and uneasy.

The obvious impact of Durbin is that it curtails debit interchange fee income for large financial institutions, says Mansel Guerry, executive vice president, administration, at Credit Union 24.

The Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2012 cut debit interchange fees roughly in half. Although the amendment exempts financial institutions with less than $10 billion in assets (all but three credit unions as of year-end 2011), there’s no mechanism for enforcement or oversight.

That means smaller institutions may lose out over time as market pressures force the interchange fees that smaller institutions receive toward the lower rate. This has led credit unions to re-examine their debit loyalty programs as a potential cost-cutting measure.

“New programs most likely will be classified as premium programs, open only to certain members versus pro-grams open to anybody, as before,” Guerry says. “Nobody has put into place new restrictions and qualifications yet, but they certainly are contemplating them.”

Statistics bear him out. Judith McGuire, executive vice president of product management at PULSE, says her organization’s annual debit card study asks participants about their plans for rewards programs in the post-Durbin environment. It revealed that in 2008, 24% of debit card issuers considered implementing rewards programs. By the first quarter of 2011, that figure had dropped to 6%.

McGuire says credit unions are less likely than other providers to attach rewards programs to their debit cards (50%, compared with 60% of large banks and 55% of community banks). More than half of credit unions offering debit rewards (54%) say they plan to restructure or terminate these programs following passage of the Durbin amendment.

“It’s taking a lot of energy for financial institutions to deal with the uncertainties of Durbin’s final configurations, as well as the mandate to follow the Network Diversity Rules that call for them to establish new network relationships,” she says. “It’s a big burden.”

Here to stay

Still, debit loyalty programs aren’t going away, says Guerry. “They’re prevalent on the landscape. There are so many loyalty programs out there and consumers are so used to them that taking them away would be the equivalent of taking down your roadside business sign. You would immediately lose business and inflict damage on yourself.”

Guerry cites his two sons as examples of savvy consumers. “When I was a credit union CEO they’d tell me, ‘Your program offers this while another program offers that.’ It made me aware that there’s a segment of the public that is always shopping.”

That’s why Michelle Thornton, senior product manager for CO-OP Financial Services, sees opportunity in the post-Durbin era. “We tell credit unions that now is the time to reach out to potential members or current debit cardholders with rewards programs. This is an opportunity to drive new business.”

“They post accumulated point totals at the bottom of statements, emboss the word ‘rewards’ on the cards, put up billboards, and remind members with Web banners and statement stuffers,” Thornton says. “They market well and often because they know members will forget if they aren’t consistently reminded.”

The NCUA’s final field-of-membership rule was published Wednesday, making it effective Feb. 6. The rule, finalized by the NCUA board in October, facilitates consumer access to credit unions and provides credit unions with more flexibility.